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CH6A: National income and employment determination, MPC (Marginal…

- - - - 2-sector economy
        
        the basic flow of household spending (consumption spending)
        
        injections - investment spending by firms
        
        national income = national output = national expenditure
      - in the real world: withdrawn+injection
        4 sectors
        
        the national income is at equilibrium when total injection = total withdrawl
        
        withdrawl: any part of income that is not used to buy domestic goods and services (S, T, M)
        
        injection: addition of spending to the circular flow (I, G, X)
        
        the basic flow of household spending - consumption spending C
        
        injections
        (1) investment spending by firms I
        (2) government expenditure by the government G
        (3) export revenue received from foreign buyers X
        
        National income will increase if injection increases and withdrawl decrease
        
        equilibrium: total withdrawl = total injections
        disequilibrium - fluctuation
        
        limitations of circular flow
        
        we also need to look at other macroeconomic indicators such as unemployment, inflation, the balance of payment position other than economic growth. The circular flow of income does not capture these indicators
        
        economy's income will not definitely increase by the same change in injection when there is a sudden large inflow of injections. because the economy is constrained by the number of resources that it has at its disposal
- - - - Downward slope
        reason for the inverse relationship:
        
        Consumers keep some of their wealth in dollar amounts, such as cash, saving accounts. whenever the price level falls, the purchasing power of such wealth rises, causing consumers to increase their expenditure, resulting in higher national output
        
        as the price falls, the country's export become more competitive and so the quantity demanded for our exports will increase aboard. imports in the country will become more expensive and domestic consumers will purchase more domestically produced goods and services. X ↑， M ↓
      - consists of 4 elements: AD = C + I + G + (X-M)
        
        key determinations of AD:
        
        investment
        
        the act of acquiring new fixed capital assets (e.g. new machinery) and accumulating physical stocks and inventories (e.g. raw materials, semi-finished goods and finished goods stored in )
        
        besides AD it also increases AS (dual purpose): enhancing production and providing extra productive capacity
        
        Net investment = gross investment - depreciation
        why invest?
        
        take advantage of higher expected profits from expanding output
        
        to generate a rise in productive capacity to meet increased demand
        
        improve efficiency via technological progress
        
        exploit EOS
        
        as a barrier of entry
        
        part of long-run process of capital substitution
        
        (a) income determination
        induced
        
        1 more item...
        
        (b) income determination
        autonomous
        
        1 more item...
        
        government expenditure
        independent of national income
        
        injection
        
        examples: expenditure on furniture, equipment, stationery supply, utilities, building roads, hospitals and schools and wages of civil servant
        
        include consumption and investment
        
        does not include transfer payment
        
        depend on the policy, considered as an autonomous expenditure
        
        the government can always raise or lower taxes if necessary
        
        exports and imports
        (X is autonomous)
        
        (direct relation)
        
        income (at home and abroad)
        
        the amount that foreigners spend on domestic export depends on their national income. X depends on foreign income, not domestic income. M however, responds to changes in domestic nation income.
        
        (indirect relation)
        
        domestic income ↑, spending on exports ↑, injection of other countries ↑, national income of other countries ↑, spending on out import ↑.
        
        rise in domestic income will lead to rise in imports. lead to depreciation in the exchange rate and make it cheaper for ppl in other countries to buy this country's exports.
        
        consumption expenditure by household (C)
        (largest component of AD)
        (increase as national ncome increase, lead to further national income increase)
        
        (a) income determinant
        induced C
        
        movement along the C function
        
        1 more item...
        
        (b) non-income determinant
        autonomous C
        
        shift in the C function
        (上下移动，斜率不变，y轴交点往上)
        
        interest rate / cost and availability
        
        interest rate falls, the cost of borrowing will fall and people are encouraged to borrow more for spending on consumer durables (e.g. furniture and cars)
        
        interest rate falls, the return on saving deposits fall and the opportunity cost of spending falls. saving will fall.
        
        interest rate falls, mortgage and other loan repayments will fall. consumers will have more money in their pocket. expenditure rise
        
        accumulated wealth and current debt position
        
        the more wealth ppl have, the more likely it is that they will spend out of their current income
        
        real assets / financial assets both increase consumer's confidence and cause them to spend more and expenditures rise
        
        expectations in future prices and incomes
        
        expect prices to rise, tend to buy them now before prices increase
        
        expect future incomes to rise, tend to spend more now
        
        if expect an recession and fall in income or fear of losing their job, they are likely to reduce consumption
        
        Income and wealth distribution
        
        the poor tend to have a higher MPC, less likely to meet all their needs due to lower-income. if they have higher income, they will spend a greater portion of the income on consumption
        
        the rich will save a larger proportion of income.
        hence, the distribution of income from rich to poor will raise the total level of consumption spending
        
        government policy
        
        if increase tax, disposable income falls, spending falls
        
        lifestyle and attitudes
        
        more materialistic the society is, the more the ppl are likely to spend
        
        if more thrifty and financially prudent, spending will fall
        
        demographics
        
        young consumers undertake a large number of credits, finance purchased especially relating to houses. spending＞income
        
        middle age, spend less than their income, repay the mortgage and loans and increase their saving for retirement.
        
        pensionable （可以领养老金）age, no more income, spend more than income
        
        non-price factor that shift AD curve
        
        autonomous changes in C, I, G, (X-M) will result a shift in AD curve
        
        1. changes in the economic outlook
        
        ↑ in business confidence, firms feel confident of buoyant sales, be encouraged to increase investment, shift AD rightwards
        
        surge in consumer confidence (e.g. future income increase) will encourage consumption, AD to right
        
        2. change in interest rate
        
        fall in ROI, less costly to borrow, encourage consumption, AD rise.
        
        however, the extent of increase in investment still dependent on the economic outlook
        
        3. changes in foreign incomes
        
        income of other countries falls, demand for one country's export decrease. AD decrease. vice versa